The real estate investment fund has been introduced by the Act of 19 April 2014 on alternative investment funds and their managers ("AIFM Act"). Clarification has been provided by the Royal Decree of 9 November 2016 on specialized real estate funds ("REIF RD").
With the introduction of this new type of real estate fund ("REIF"; "Fonds d’investissement immobilier spécialisé" in French and "gespecialiseerd vastgoedbeleggingsfonds" in Dutch), the Belgian legislature aims first and foremost to offer a tax-transparent investment vehicle to (i) institutional investors, which do not always wish to use a regulated real estate company ("RREC", "Société immobilière réglementée" in French and "geregementeerde vastgoedvennootschappen"in Dutch), and (ii) foreign institutional investors (investing in Belgian and foreign real estate). The intention of the Belgian legislature was to introduce an investment vehicle which does not qualify as a public alternative investment fund ("AIF") but which still benefits from advantageous tax treatment. Hence, the REIF is deemed an institutional AIF.
REIF is a novelty in the Belgian legislative landscape, which has been materialised since two REIF have been established and registered within the list kept by the Federal Public Service Finance in April 2017.
This article explains the new REIF rules: the scope of application of the REIF legislation (Section 1), the supervision and recognition of REIFs (Section 2), the main characteristics of a REIF (Section 3) and, finally, the tax treatment of REIFs (Section 4).
1 Scope of application
1.1 Ratione personae
Shareholders in REIF must be "eligible investors" which can be divided into three categories:
a. professional clients (as defined in the AIFM Act);
b. eligible counterparties (as defined in the MiFID RD and the REIF RD); and
c. designated eligible investors (legal entities that have registered with the FSMA).
1.2 Ratione materiae
Both immovable property located abroad and in Belgium are eligible investments. However, immovable property located in Belgium must be held directly by the REIF. This definition is intended to prohibit the practice of holding immovable property indirectly through the establishment of special purpose vehicles. Nonetheless, an exception is provided for in the REIF legislation, i.e. it is permitted for a REIF to hold immovable property indirectly if (i) it is held through a wholly owned (directly or indirectly) subsidiary of the REIF and (ii) if the subsidiary is converted into or otherwise meets the requirements of a REIF within a period of 24 months.
2 Supervision and recognition
The REIF is not subject to an approval procedure nor to prudential supervision by the FSMA. REIF status is obtained after confirmation is received that the investment vehicle has been included on the list kept by the Federal Public Service Finance, which has no discretionary authority in this regard and can only refuse registration if the file is incomplete.
3 Main characteristics
3.1 Term and termination
The REIF is a closed-end fund with fixed capital. Hence, withdrawal from the fund is only possible by selling the shares on the secondary market. The redemption of shares or other securities is excluded.
Due to limited liquidity, the term of existence of a REIF is limited to 10 years. However, this period can be extended by subsequent periods of 5 years, pursuant to an unanimous decision of the extraordinary general meeting at which at least half the share capital is present or represented. At the end of its term of existence, the assets are sold and the REIF automatically enters liquidation.
3.2 Investment policy
Access to a REIF is limited to eligible institutional investors and the total value of the immovable property held by the REIF must amount to at least EUR 10,000,000 by the end of the second accounting year following inclusion on the list of REIFs.
Furthermore, the REIF benefits from very flexible treatment with regard to its investment policy. A REIF is not obliged to diversify its investments, nor is it obliged to maintain to a certain debt-to-equity ratio. Therefore, a REIF can invest in a single property, with the freedom to determine the loan-to-value ratio. However, a REIF can voluntarily choose to apply limitations on its investment policy by incorporating them into its articles of association.
Finally, the REIF (unlike the regulated real estate company) is a "passive entity", for the exclusive purpose of collective investment in real estate. A REIF cannot conduct any other operational activities, while a regulated real estate company for example is expressly authorised to have operational teams.
In principle real estate development activities are prohibited. However, occasionally, such activities can be exercised, within the same limits applicable to regulated real estate companies.
3.3 Accountancy obligations
The REIF is subject to several accountancy obligations, similar to those applicable to the RREC and the SICAF, including:
a. the distribution of 80% of its net profits and realised capital gains;
b. preparation of annual accounts in accordance with IFRS;
c. determination of the actual value of its real estate portfolio by an independent expert at least annually (with each different material real estate transaction or restructuring of the company, unless recent figures are available and the expert confirms that there is no need for a new valuation); and
d. preparation of an annual financial report in which the origin of the profits received and redistributed is explained
4 Tax treatment
4.1 Taxation at the fund level
The REIF, like the SICAF and RREC, is transparent for tax purposes, meaning that corporate tax is due only on (i) non-arm's length benefits received and (ii) non-deductible expenses and costs other than reductions in value and capital losses on shares (Art. 185bis of the Income Tax Code 1992 or "ITC"). Consequently, the main income of a REIF, i.e. rental income, capital gains, interest and dividends, is not subject to corporate tax.
However, REIFs are not eligible for the derogatory taxation regime for profits of up to EUR 322,500 (Art. 215 §3(6) ITC). The applicable rate is thus the normal corporate tax rate of 33.99%.
The fact that REIFs are subject to corporate tax, albeit at a reduced rate, means they can also qualify for the benefits provided for by Belgium's network of double tax treaties.
A so-called "exit tax" applies when a Belgian company (which already owns real property in Belgium) is included on the list of REIFs. The reason for this tax is the REIF's limited corporate tax base (as described above), which means that latent capital gains on, amongst other items, real estate and exempt reserves, will never be taxed. In order to compensate the fact that the REIF will be subject to a derogatory tax regime, the inclusion of a fund on the list of REIFs is treated as its winding-up and liquidation thereby triggering an ‘exit tax’ on latent capital gains and exempt reserves. The tax base can however be reduced if the REIF has tax losses or through application of excess notional interest deduction. The exit tax rate is more advantageous than the standard corporate tax rate and amounts to 16.995% (including a crisis surcharge). The effective rate is thus equal to only half the corporate tax rate, although it is not expressly defined in this way in the legislation. As a result, any reduction in corporate tax (as announced in government circles) will not automatically imply a corresponding reduction in the exit tax rate. Thus, if the legislature does not specifically adjust the exit tax rate of 16.995%, a reduction in the corporate tax rate (for example to 24-26%) will adversely affect the choice to opt for REIF status.
In addition, exit tax also applies when a registered REIF acquires real property as a result of any of the transactions listed below:
If a REIF, by way of contribution of a branch of activity or a totality of assets, acquires real property, the transferring company is taxed on the latent capital gains at a rate of 16.995% (Art. 217(1)(1)(1) ITC).
Moreover, a contribution of individual real estate assets to a REIF is subject to exit tax if the contribution is exclusively remunerated by new shares (Art. 217(1)(1)(2) ITC).
Finally, exit tax is due by the transferring company on latent capital gains or exempt reserves when a REIF acquires real property through a merger, division or similar transaction (Art. 211 §1(6) ITC).
The exit tax is always levied immediately without the possibility to spread taxation for capital gains (Art. 47 §7 ITC). From a tax point of view, a merger is considered liquidation with the consequence that withholding tax is due at a rate of (in principle) 30% on so-called "deemed dividends" (liquidation proceeds), which cannot be credited. In this regard, it should be noted that an exemption from or reduction in withholding tax can be available in a purely domestic situation under Belgian tax law, while in a cross-border context, the tax rate can be reduced through the application of double tax treaties (for example, the Belgian-Dutch treaty provides for a tax rate of only 5%).
Annual tax on collective investment institutions
Finally, REIFs are subject to an annual tax on collective investment institutions which amounts to 0.01% of the total net amount invested in Belgium on 31 December of the preceding year (Art. 161bis §1 Inheritance Tax Code).
4.2 Taxation at the level of the shareholder
The principle of limited taxation at the level of the REIF is compensated by full taxation at the shareholder level. This tax shift from the fund to shareholder level is due to the REIF's tax transparency.
As individual investors cannot invest in REIFs, the following overview is limited to the tax consequences for domestic and foreign non-individual shareholders.
Dividends distributed to Belgian corporate shareholders
In principle, distributed dividends are subject to withholding tax at a rate of 30%, which is withheld and paid by the REIF. However, if the recipient has held a stake of more than 10% in the REIF for a period of more than one year, no withholding tax is due. Furthermore, the withholding tax paid can be credited against corporate tax, which may result, where appropriate, in a tax refund.
When a Belgian shareholder receives dividends from a REIF, the origin of the dividends is examined in order to determine the applicable tax treatment. On the one hand, dividends stemming from Belgian-source income (Belgian dividends and income from Belgian real property) are subject to the normal corporate tax rate of 33.99%, without the possibility to apply the dividends received deduction (“DRD”). It follows that while a Belgian institutional investor may not benefit from the contribution of its real estate to a REIF in terms of corporate tax, it will benefit from a subsequent divestment as regards capital gains tax (and registration duties). An exception is provided so that the DRD is still available to the extent the dividends arise from taxed income, such as income from immovable property that has already been taxed abroad or dividends which themselves qualify for the DRD. If the conditions for the DRD are met, 95% of received dividends are exempt from corporate tax, which results in an effective tax rate of 1.7% (i.e. the normal tax rate of 33.99% applied to 5% of the income or dividends).
Dividends distributed to foreign shareholders
To calculate the tax on dividends distributed by a REIF to foreign shareholders, it is once again important to separate out dividends from Belgian-source income. Dividends from Belgian-source income are subject to a withholding tax of 30%, unless a reduction is provided for by the tax treaty between Belgium and the country of which the beneficiary is a tax resident, which is frequently the case (e.g. the Belgian-Dutch tax treaty provides for a tax rate of 5%). The remainder of received dividends, not arising from Belgian income, is exempt from withholding tax (Art. 106 §7 RD/ITC). It is clear that institutional investors (companies, funds, etc.) from countries with a favourable tax treaty, which are not subject to corporate tax in their country of residence or are subject to tax on a limited basis, can efficiently structure their investments in Belgium through a REIF.